Income inequality, the term du-jour for pundits and politicians in an election year, can now be applied to the 401(k) space. Simulations run by the Government Accountability Office (GAO) find households in the lowest earning group will have about $560 per month on average (in 2015 dollars) of retirement income.
In contrast, households in the highest earning group saved enough to receive about 11 times more in retirement income.
The GAO reports an estimated 40 percent of all U.S. households had some retirement savings in a defined contribution (DC) plan. The 60 percent of all households (and specifically the 44 percent of working households) without any DC savings in 2013 may result from several factors.
Approximately 39 percent of working households lacked access to, or were not eligible to participate in, an employer-sponsored DC plan at their job in 2013. Low-income households and Black and Hispanic households were even less likely to have access to a DC plan at their workplaces or to have DC savings. For example, GAO found that approximately 25 percent of working, low-income households had any savings in a DC plan compared to 81 percent of working, high-income households. By 2013, White households’ median DC balances were more than three times larger than for Black and Hispanic households’.
GAO also simulated several scenarios involving workers’ decisions and employer decisionsthat increased the amount of projected DC savings available for retirement—particularly for low-earning workers. While GAO’s projections of these scenarios show many possible ways to increase DC savings, they do pose potential tradeoffs for both workers and employers.
Defined contribution (DC) plans, in which individuals save for their own retirement, have become the dominant form of retirement plan for U.S. workers. However, not all workers have access to or participate in such plans through their employer. DC plans also shift more risk to participants compared to traditional defined benefit (DB) pension plans. For example, a worker often needs to decide to participate in a DC plan, make regular contributions, and decide how to invest those savings before retirement. GAO was asked to review recent trends and future prospects for DC plan savings to avoid income inequality.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
